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Profit or panic? 12 wealth managers on how to plan for 2018

Global growth, Brexit and US tax cuts are all exercising our readers’ minds as the year draws to a close.

Julian Chillingworth

Chief investment officer, Rathbones, London

‘UK investors may have to look abroad for returns next year, and probably have to accept lower returns compared to this year too. Globally, economic growth should continue to tick along at its slightly lower than average rate; however, there are some events that could cause asset prices to become more volatile.

‘The US is on the cusp of a tax cut that has to be passed this year or not at all. If it passes it could boost sentiment in the US; if it fails it could cause a correction.

The Federal Reserve is expected to increase interest rates at a faster pace and the European Central Bank could significantly reduce its quantitative easing programme.

‘These reductions in global liquidity may cause some ructions in asset prices, but we don’t expect the effects to linger because most leading indicators show no concerning signs.

‘We believe global GDP growth is relatively healthy, robust and widespread. That said, we believe the UK’s growth will stagnate next year, although not to recessionary levels.’

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Julian Chillingworth

Chief investment officer, Rathbones, London

‘UK investors may have to look abroad for returns next year, and probably have to accept lower returns compared to this year too. Globally, economic growth should continue to tick along at its slightly lower than average rate; however, there are some events that could cause asset prices to become more volatile.

‘The US is on the cusp of a tax cut that has to be passed this year or not at all. If it passes it could boost sentiment in the US; if it fails it could cause a correction.

The Federal Reserve is expected to increase interest rates at a faster pace and the European Central Bank could significantly reduce its quantitative easing programme.

‘These reductions in global liquidity may cause some ructions in asset prices, but we don’t expect the effects to linger because most leading indicators show no concerning signs.

‘We believe global GDP growth is relatively healthy, robust and widespread. That said, we believe the UK’s growth will stagnate next year, although not to recessionary levels.’

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Ryan Hughes

Head of fund selection, AJ Bell Investments, London

‘With global growth continuing to progress nicely and the all-important US economy performing strongly, the backdrop for emerging markets continues to look attractive.

‘From a valuation perspective, emerging market equities continue to sit at a significant discount to global equities on a PE basis despite the strong performance from emerging markets in 2017.

‘Ownership of emerging markets remains relatively limited, albeit global flows have turned positive this year, but should sentiment remain in place, it is possible that a large pick up in emerging market allocations could occur, creating an attractive tailwind.’

‘From an investment perspective, I like the Fidelity Global Emerging Markets fund, run by Nick Price. He is a bottom-up stock picker with a huge amount of experience and is comfortable investing in a manner very different to the index.’

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Liz Bottomley

Managing director, private banking, Arbuthnot Latham, London

‘Brexit, is likely to create structural changes in the way the current UK economy functions.

‘The international regulatory environment will continue to evolve and have an impact on private banking businesses and their clients, in particular Mifid II and the general data protection regulation regime which both come into force next year.

‘The management of net interest income margin will become critical as interest rates gradually begin to rise and private banks will need to manage the issues associated with rising deposit costs.

‘The property market, particularly in prime central London, will continue to be difficult and we will continue to focus on our niche of structuring bespoke deals for clients.

‘The client experience is of the utmost importance to us. In 2018, as other banks continue to restructure and move clients around, we will focus on stability and building long-term client relationships.’

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Richard Hyder

Investment director, Psigma IM, Edinburgh

‘We continue to believe that the near future will look like the recent past and the trend of “solid, but unspectacular” growth, which the global economy has enjoyed (or endured) over the last eight years, will persist through next year.

‘The current “above trend” growth rate that is being enjoyed in the US, China and Europe is unlikely to persist through the whole of next year and we would expect a global economic growth to go back down towards 3%.

‘Our current view is that equity markets will struggle to make much headway next year at an index level. As of yet, we do not see the conditions required to bring about the onset of a new bear market, nor do we believe that valuations of most company shares are at such cheap levels that gains will be easy to achieve.

‘Indeed, our view from the start of 2017 that there will be a great divergence in the fortunes of various different sectors and companies persists and this should ensure a fruitful environment for active managers after a renaissance in their fortunes this year.’

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Neil Shillito

Director, SG Wealth Management, Norwich 

'Whatever human beings might be, they are not rational, and on that basis and combined with my natural optimistic outlook, I believe we might be in for "much of the same" over the coming year.

'This probably flies in the face of reason and rationality but we have had plenty of time (and good reason) in the last couple of years at least to exhibit headless chicken behaviour and throw ourselves out of ground floor windows, but we haven’t, so what’s going to change in the next 12 months?

'A brief list of headwinds and threats would include Trump, North Korea, debt, irrational exuberance, Brexit, QE and sluggish growth - all of which have been present for some years and will persist throughout 2018.

'I await the bile and opprobrium that will be heaped upon me when events unfold to confound me.'

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Neil Whelan

Investment director, RC Brown Investment Management, Bristol 

'We believe US valuation multiples are extended and we will look to continue to take profits as the market continues to rise. Elsewhere, markets such as Japan remain cheap against their long-term valuation history, supported by growing dividends from companies with strong balance sheets and improving profits streams.

'The UK and European markets are more difficult to call because political factors are likely to have a significant effect on investor confidence. However, economic growth remains positive and many companies remain attractively valued.

'The ongoing trend of rising economic growth is likely to result in a steady withdrawal of economic stimulus and this is expected to result in a gradual rise in interest rates. This scenario still favours equities and will not be a good environment for fixed income. We expect to maintain our underweight asset allocation to bonds, with a continued focus on the shorter end of the yield curve.'

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Ryan Paterson

Research analyst, Thesis Asset Management, Portsmouth 

'We think conditions are beginning to turn back in favour of talented active managers, as sector rotation intensifies. This is quite a different scenario to the one in which the “average” stock-picker or passive investment is more likely to outperform, and with different characteristics.

'The conditions we view as conducive to active management are: higher dispersion - the difference between winners and losers offering significant reward; low correlations - falling average pairwise correlation; and finally low market volatility.

'Those not willing to try to select a star manager can capture these characteristics through dispersion strategies which involve taking long positions in a basket of single stock volatility and a short position on index volatility via a swap. The upward pressure on index vol. from buyers of protection and downward pressure on single stock vol. as banks seek to offload risk, means the spread is currently tight and therefore makes for a favourable entry point. 

'If our view is correct and the individual assets returns are widely dispersed then there may be little movement in the index, but a large movement in the individual assets. In this scenario we gain from the difference in “realised” volatility.'

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Chris Wyllie

Chief investment officer, Connor Broadley, London

'2017 was a year for staying the course. 2018 could be a year for changing tack.

'Entering 2017, we felt the consensus was over-stating political risks and under-rating global growth prospects. This left room for markets to rise. Now, investors have embraced optimism, with both political and economic risks deemed low. The risk/reward equation is less favourable.

'As long as real interest rates remain low, and growth looks assured, the long bear squeeze can continue into 2018. However, growth is threading the needle; either a deceleration or acceleration from here will challenge valuations, through pressure on earnings, or interest rates. The latter seems more likely, as reflation resumes. If so, there is money still to be made in banks and oil, before higher real rates bite later in the year.'          

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Piers Cushing

Managing director, Plurimi Wealth LLP, London 

'The discretionary portfolio management team will tread carefully in 2018, especially if the dichotomy between rational and irrational exuberance intensifies. Structural, legacy issues including excessive private debt (corporate and household) will continue to weigh upon inflation and growth, amongst other key variables, and it remains to be seen if the Federal Reserve can maintain QT beyond Q2 2018.

'Liquidity – US dollar liquidity specifically – will be key, especially for emerging markets. We are concerned that global, secular disinflationary pressures will continue to surprise investors, and we maintain a healthy position in HQLA to balance out equity risk. Ten-year Treasury yields breaching the lows of 2012 and 2016 would surprise many, but not us.   

'In 2018, will excessive valuations finally become a concern? For our equity investments, we continue to opportunistically target modestly priced companies with strong balance sheets and defensible business models, generating sustainable revenue and FCF growth by providing indispensable and differentiated products and services.'

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Beckie Williams

Senior private banker, Nedbank Private Wealth, Isle of Man 

'Changes in monetary policy are likely to occur at a glacial pace to avoid disrupting the still fragile improvement in global economic activity, especially given the backdrop of longer-term structural challenges, such as high debt levels and low productivity growth.

'Corporate earnings should grow at a reasonable pace over the next couple of years, which will be supportive for equities. However, better growth could prove a headwind for government bonds.

'In terms of valuations, the equity-bond yield gap continues to suggest shares offer better potential than bonds, while on the currency side we expect the US dollar to be well supported by higher US interest rates, especially against sterling, which would come under further pressure if the Brexit negotiations fail.'

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Rupert Robinson

Managing director, Gresham House Asset Management, London 

'The probability is that the post-financial crisis economic recovery is now in the late cycle stage, with the US leading. With the Federal Reserve and other central banks set to raise rates and reduce their balance sheets, the risk of policy error will grow in 2018.

'Equity markets have performed strongly pushing valuations into extremely expensive territory. Relative to bonds, valuations look less stretched but that assumes inflation will remain benign. Inflation is set to move higher in 2018.

'History tells us that equity valuations can remain overvalued for a long time but as central banks take away the punch bowl, the risks are increasing. In an environment where investors will continue to feel the effects of a low return world, we have a strong bias for private markets which can offer higher returns than traditional asset classes and lower risk.

'We like sustainable real asset-backed investments that seek to deliver investors high single digit returns, predictable cash flow yield, inflation protection are less correlated and lower risk.

'For example, ground-mounted solar parks and onshore wind farms, which provide stable and attractive long term (20 years) RPI inflation linked revenues; timber or forestry where returns are truly uncorrelated (biological growth) and enjoy significant fiscal benefits (IHT, income and capital gains tax); and investment in energy storage (batteries) systems which generate high cash yields (7-8%) for investors, as renewable energy takes up a larger share of the energy mix and batteries are used to replace older coal-fired power stations in providing re-balancing services to the National Grid.'

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Kirsten Boldarin

Partner (investment management), Stonehage Fleming, London 

'In 2018, we see synchronised growth continuing to support risk assets but believe the change in the macroeconomic, political and policy environment will re-order the market leadership.

'In order to position pre-emptively for these changes, we are emphasising equity sectors and regions where valuations are more compelling. This means a move away from the incumbent leaders and a focus on some of the sectors which have lagged. This is particularly acute in the US market. Here, we are participating through a combination of active management and “smart” passives to access “value” rather than “growth”.

'In addition, we have increased our exposure to markets which exhibit lower valuations where improved growth will lead to better earnings. This means more European equity and emerging market equity exposure.'

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